Volatility is the bread and butter of the cryptocurrency market. And in the year 2022, the cryptocurrency market has tumbled drastically, with the top two cryptos losing over 50% of their price value. The rest of the market soon caught on as investors counted obscene losses, taking the market capitalization below $1 trillion in June 2022.
Determining Crypto Crash Signals
Whenever a market crash is experienced, it spreads fear across even the most resilient traders in the crypto market. With the fear that crypto prices will continue to plunge, investors panic-sell their crypto holdings where they inconsequentially incur huge losses.
Have you ever wondered how crypto aficionados can forecast almost accurate analysis and price projections during a crypto crash? Well, that’s because they have mastered all the signals and price patterns of major cryptocurrencies. Seems like a lot to grasp, but it’s not. Continue reading, and you will see how easy it is to predict the next crypto crash.
What Is a Crypto Crash?
Before we take a gander at the critical market features that signal the unfolding of a crypto crash, first, let’s conceptualize the best way to describe/define a crypto crash.
Fundamentally, it’s a known fact that cryptocurrencies are volatile, and their prices can fall or rise due to factors such as inflation, interest rates, speculation, and trends in the stock markets. These factors influence crypto market movements and, if encountered in adverse economic conditions, can result in a sharp drop in prices. If this drop is consistent for a long period without hopes of a rebound, that’s what is referred to as a crypto crash.
At the time of writing, the current price plunge in the crypto market is considered the worst cryptos crash ever. Since the peak of the bull run last year, even the most popular cryptocurrencies, like bitcoin and ether, have lost around 70% of their value. The industry’s total market capitalization decreased significantly, from approximately $3 trillion to less than $1 trillion.
Now, let us look into easy-to-spot signals that a crypto crash could be imminent;
Easy to Spot Signals of a Coming Crypto Crash
Market Value to Realized Value
The Market-value-to-realized-value(MVRV) ratio measures an asset’s market capitalization versus its realized value. It can determine when the price is above or below “fair value.” In addition, it can determine the profitability of the market.
Traders can use the extreme market-value and realized-value extremes to identify the top and bottom markets. Hence, they give insight on profit and loss, respectively.
When the MVRV reading reaches over 3.5, a top formation can be expected, and investors are more likely to gain.
The green horizontal line can identify a buying opportunity when the MVRV drops below 1. On the other hand, traders can use the red horizontal line to identify a higher value of the MVRV above 3, which is usually the case when the crypto price retraces. The backtesting of this strategy can provide investors with valid signals regarding the price of a cryptocurrency. It can also help them determine whether it is overvalued or a good buying time.
For example, on February 17, 2021, the bitcoin price hit $52,138 when the MVRV was at the 3.7 level. It rose steadily and reached its highest point on March 19, 2021, at around $58,374. The bull market continued to run its course, and the price peaked around three months later at $64,000.
An on-chain analysis is a process utilized in the analysis of cryptocurrencies. It involves looking into the various factors that affect their development. Because of the nature of cryptocurrencies’ blockchains, their data can be collected by anyone. Hence, all investors can analyze and gain insight into the market.
On-chain data refers to the information that is collected about all transactions that happen on a blockchain network. This data includes details of the transactions done on the network, i.e., the amount of crypto transacted, the block data and the timestamps.
On-chain analysis can help traders improve their strategies by monitoring the network’s health in real-time. It can also help them predict future market trends.
Using the data collected by on-chain analysis, crypto traders can predict the market’s future direction. They can also use it to identify potential trends. For instance, if there’s a spike in the number of transactions and active addresses, it can indicate a rising price. On the other hand, fewer active addresses and transactions could show a market crash is coming.
Although bitcoin is often regarded as a non-correlated asset, its recent evidence suggests that it is highly correlated to equities. It indicates that investors should not be overly bullish on cryptocurrency.
Bitcoin’s correlation with traditional finance is not good news. The asset might also be affected when macroeconomic conditions, such as monetary tightening, stock market volatility, and inflation, are unfavorable.
One of the most critical factors investors should watch is how the central banks communicate. The correlation between the prices of cryptocurrencies and Nasdaq is very high. Jonathan Cheesman, the head of FTX Access, a digital asset exchange, said that the company is currently focused on micro-focused trading in cryptocurrencies. He previously worked for both HSBC and Goldman Sachs.
According to a report released by Arcane Research in April 2022, the correlation between the prices of cryptocurrencies and the Nasdaq reached its highest point, 0.70. How is this relevant, you might ask? The correlation between the prices of cryptocurrencies and the various asset classes is measured on a scale of -1 to 1. A -1 means that the prices are moving in the opposite direction. On the other hand, one means that the prices are perfectly synchronized.
The report’s author, analyst, and former research director, Vetle Lunde, noted that the correlation between the prices of cryptocurrencies and various asset classes is in an extreme state. For instance, bitcoin has a high correlation with equities. At the same time, its negative correlation with the US dollar and gold is also unprecedented. He said that it is unlike anything seen in the market.
Although the correlation between bitcoin and equities is strong, it does not imply that the latter is following the former. There is virtually no time lag between the two, so they tend to go up or down simultaneously. In some cases, bitcoin rises or falls before the Nasdaq.
According to Lunde, the lack of consistency among market participants may be caused by factors such as liquidity and resting market orders. For instance, major market players in crypto have a different response formula.
According to him, the relationship between the macro and crypto is strong. He believes that the various structural factors affecting the market, such as the de-dollarization and the increasing popularity of decentralized alternatives, are positive for cryptocurrency.
The Aftermath of a Crypto Crash
When a market crash happens, there is either a possibility of recovery or a further downturn. For example, despite the difficulties the cryptocurrency market had gone through last year, some assets ended the year with record highs. Bitcoin and Ethereum, for instance, recovered by 80% and 90%, respectively, hitting new ATHs.
On the other hand, although cryptocurrencies have been experiencing various crashes, it’s still not always possible to predict how they will recover. They are still considered very speculative investments and may fail in the future. If you’re considering investing in them, keep in mind that there’s still a chance they won’t be able to bounce back.
If you are new to the world of cryptocurrencies, this year’s crash is not the first time virtual currencies’ values have nosedived, and it may very well not be the last time. Shun away the words of so-called ‘experts’ that see cryptocurrencies as a bubble prone to burst; the said bubble has been around for over a decade. Volatility is one of the most popular traits of digital currencies, so if you witness unpredictable accelerations to the top or mouth-widening plunges, it shouldn’t come as a surprise.
The case for the bottom is compelling, as it shows that prices are either at or near the bottom. It’s also important to note that the long-term trend remains unpredictable. Despite the crypto crash’s woes, it also presents an excellent buying opportunity. However, before investing in a cryptocurrency, do your research as you find an entry point into the market.